detecting trend direction & strength - star et al

T TRADING BASICS Combine ADX And MACD Detecting Trend Direction And Strength Using an indicator by itself can reveal a portion of the entire picture.. They look to indicators for signs o

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Stocks & Commodities V 20:1 (22-25): Detecting Trend Direction And Strength by Barbara Star, Ph.D.

Copyright (c) Technical Analysis Inc.

T

TRADING BASICS

Combine ADX And MACD

Detecting Trend Direction

And Strength

Using an indicator by itself can reveal a portion

of the entire picture Combining it with another can reveal more.

by Barbara Star, Ph.D.

raders use technical indicators to recognize market changes They look to indicators for signs of price direction, momentum shifts, and market volatility Among the most sought-after indicators are those that identify price trends Traditionally, moving averages serve that purpose, but they suffer from whipsaw action during price consolidations However, there is another approach This article shows how to combine two popular indicators to help traders detect not only trend direction but also trend strength.

The indicators involved are the average directional index (A DX ) and the moving average convergence/divergence (M ACD ) The A DX

functions as a trend detector, rising as price strengthens into an identifiable trend and falling when price moves sideways or loses its trending power A DX values in the 20 to 30 range indicate mild to moderate trending behavior, while values above 30 usually signify a strong trend Unfortunately, the A DX does not reveal the trend direction The M ACD , on the other hand, indicates price momentum and can also be used

to identify price direction as it rises above its trigger line or falls below its zero line.

When both indicators are plotted on the same chart, trend strength and trend direction become clear The chart of A OL Time Warner (A OL ) in Figure 1 illustrates how the two indicators complement each other The A DX

in the upper panel rose from April through May 2001, indicating a trending market The

M ACD rose above its dotted trigger line and its zero line, showing that price direction was up During July and August the A DX rose once again, but the M ACD was then below its trigger

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line and its zero line, showing that a downtrend

was in progress.

Most traders prefer the long side of the market

and look for an uptrending market The

confirming pattern identifies exactly that

condition When the A DX and M ACD move

up in unison, they confirm rising price

direction; the Bristol-Myers Squibb Co.

(B MY ) chart in Figure 2 offers a good example

of a confirming pattern The A DX and M ACD

rose as price moved up strongly in September

to December 2000.

When price changed direction in January

2001, both the A DX and M ACD followed suit.

The falling A DX was not indicating that a

downtrend had begun; merely that it no longer

could find a trend In this example, the M ACD

showed that price was retracing its prior upward

march But sometimes when both indicators

fall, price forms a sideways trading range, rather

than the more pronounced downward move

seen in this chart.

The indicator combination shines when a price

downtrend is in progress and they form a

divergence The A DX rises as it identifies the

trend, while the M ACD falls below its trigger

line and often below its zero line The two

indicators no longer move in tandem; instead,

they diverge and form almost a mirror image of

each other During the severe 2000–01 decline

in Cisco Systems (C SCO ), the A DX -M ACD

combination formed several easily identifiable

diverging patterns as one rose and the other fell

(Figure 3) They reflected the falling prices in

September–October and December 2000 time

periods, as well as the continuing decline in

February–March 2001.

The diverging indicator pattern should warn

those who want to go bullish to stay out of a

stock However, for those who wish to sell

stocks short or purchase put options, the

diverging pattern provides a visual gold mine.

But expect a price shift when the indicators stop

moving apart and begin to move toward each

other (as they did in April and May).

Prices tend to consolidate periodically during

an uptrending move prior to continuing the

trend or changing direction The indicators

highlight a price consolidation when the A DX

falls, while the M ACD remains near or above its

FIGURE 1: ADX AND MACD WITH AOL TIME WARNER (AOL) The rising ADX in the upper panel does

not differentiate between up- or downtrending price movements Plotting the MACD just below the ADX makes the trend direction much easier to spot.

FIGURE 2: A CONFIRMING PATTERN ON BRISTOL-MYERS SQUIBB (BMY) Both the ADX and the

MACD signal a rising trend is in progress when they move up together with price.

FIGURE 3: A DIVERGING PATTERN ON CISCO SYSTEMS, INC (CSCO) The indicators highlight a

downtrend by diverging and forming a mirror-like image.

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Stocks & Commodities V 20:1 (22-25): Detecting Trend Direction And Strength by Barbara Star, Ph.D.

The combination can help traders stay on the right side of the market and increase the probability of successful trading results.

zero line This pattern often occurs following a confirming pattern, as the chart of Bank of America Corp (B AC ) in Figure 4 illustrates Both indicators rose during the price uptrend

in December 2000 and January 2001 Both indicators fell as price declined in February

2001 But the A DX continued to decline, while

M ACD remained at or above its zero line as price entered a trading range consolidation in March and April Once prices resumed their upmove in May, both indicators once again began to rise.

S OME OBSERVATIONS

• ADX: The ADX can be confusing because it is interpreted differently from other indicators Most indicators move up when prices rise, and they fall when prices decline As seen in the chart of Toys “R” Us (T OY ) (Figure 5), that was not necessarily the case with the A DX

At point A the A DX was rising while price moved down The A DX pulled back slightly at point B as prices rose However, at point C the

A DX rose in conjunction with prices The A DX

declined between points C and D, while price moved sideways before resuming the uptrend indicated by point D The A DX dip into point E paralleled a price decline during June But instead

of a continuation of the preceding uptrend, the next A DX rise at point F was met with a further decline in price The moral? Don’t try to second- guess price direction with the A DX

• M ACD: Even the venerable MACD misleads

us at times Often, we forget the M ACD is basically a momentum indicator, so it does not always accurately reflect price movement either Figure 6 displays an example with AT&T (T).

In addition to the A DX and M ACD in the upper panels, I plotted a 13-unit simple moving average

of price on the chart The 13-unit moving average tends to correspond with the M ACD solid line crossing above and below its dotted trigger line when the M ACD is accurately tracking price.

FIGURE 4: A CONSOLIDATION PATTERN The box shows price consolidation that followed a price

uptrend in Bank of America (BAC) stock The ADX declined but the MACD remained above zero to

reflect the consolidation.

FIGURE 5: ADX WITH TOYS “R” US (TOY) By itself, the ADX can be confusing to interpret because

its ups and downs do not necessarily follow price.

FIGURE 6: MACD WITH AT&T (T) Because it is a momentum indicator, the MACD does not always

track price accurately.

MACD at or above zero line

13-unit moving average

1

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At point 1, the M ACD solid line rose above its trigger line,

which reflected the upmove in price At point 2 the M ACD

crossed below its dotted line, following price to the downside.

However, the M ACD rise above its trigger line at point 3 was

not joined by rising prices or an upsloping moving average.

The M ACD rose because downward momentum pressure had

diminished as prices slowed their downward descent.

• Indicator combo: As the charts show, both the MACD and

the A DX register their signals after the start of a price move,

with the A DX slower to respond than the M ACD That means

the indicator combination will not pinpoint tops and bottoms.

However, traders can expect the A DX –M ACD combination to identify and capture part of a trending move More important,

it can help traders stay on the right side of the market and increase the probability of successful trading results.

Barbara Star is a part-time trader and former university professor She is a past vice president of the Market Analysts

of Southern California and led a MetaStock users group for many years She is a frequent contributor to Technical Analysis of STOCKS & COMMODITIES Currently, she provides individual instruction and consultation to those interested in

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Stocks & Commodities V 18:4 (62-68): Picking Out Your Trading Trend by Martin J Pring

CLASSIC TECHNIQUES

T

Pick Out Your

Trading Trend

There are three kinds of trends: short, intermediate, and long

term This veteran trader and analyst explains how you can

spot them and use them.

by Martin J Pring

echnical analysis assumes that all the knowledge, hopes, and fears of both active and inactive market participants are reflected in one thing: the price Even if I am in a cash position, I am still influenc- ing the price because it would be higher if my cash were invested.

Thus, prices are determined by

Bull market 9-months -2 years

PRIMARY TREND

Approximately 4-years

Bear market 9-months -2 years

psychology This would just be an interesting observation,

except that psychology moves in trends, and so do prices.

Most of the technical tools we use are aimed at identifying

trend reversals at an early stage We ride on trends until the

weight of the evidence shows or proves that the trend has

reversed — in this case, the number of reliable technical

indicators all pointing in

the same direction.

Hence, the greater the

number of indicators

sig-naling a reversal, the

greater the probability

that a reversal will take

place It is important to

remember that technical

analysis only deals in

probabilities, never

cer-tainties Unfortunately,

there is no known method

of forecasting the

dura-tion and magnitude of a

trend with any degree of

consistency Identifying

reversals is hard enough.

What is a trend? How

long do they last? Before

the advent of intraday

charts, there were three

generally accepted

dura-tions — primary,

inter-mediate, and short-term.

The main or primary

trend (Figure 1) is often referred to as a bull or bear market.

Bulls go up and bears go down Typically, they last from about nine months to two years, while the bear market troughs are separated by just under four years These trends revolve around the business cycle and tend to repeat This is true whether the weak phase of the cycle is an actual recession

or there is no recession or growth.

A fourth category, the secular trend, embraces several

primary trends and lasts between 10 and 25 years An ample using US bond yields between the 1930s and the 1990s can be seen in Figure 2.

Primary trends are not straight-line affairs, but consist of

a series of rallies and reactions Those rallies and reactions

FIGURE 1: PRIMARY TREND The classic four-year trend is broken almost equally into

bull and bear modes.

FIGURE 2: SECULAR BOND TRENDS In 1982, the downtrend in bond prices broke along with inflation, setting off the greatest stock bull

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are known as intermediate trends and are represented in

Figure 3 by the solid blue line They can vary in length from

as little as six weeks to as much as nine months — the length

of a very short primary trend Intermediate trends typically

develop as a result of changing perceptions concerning

eco-nomic, financial, or political events.

It is important to have some understanding about the

direction of the main or primary trend This is because rallies

in bull markets are strong and reactions weak, as shown in

Figure 3 On the other hand, bear market reactions are strong

while rallies are short, sharp, and generally unpredictable If

you have a fix on the underlying primary trend, then you will

be better prepared for the nature of the intermediate rallies and reactions that will unfold.

Classic technical theory holds that each bull market tains three intermediate cycles, as does each primary bear market (Figure 4) I would use this only as a guide, since many primary trends are not easily classified this way Thus,

con-if you are waiting for that third intermediate cycle in a bull market, it may never materialize.

In turn, intermediate trends can be broken down into term trends that last from as little as two weeks to as much as five or six weeks They can be seen in Figure 5, represented

short-by the dashed red lines.

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CALCULATING THE KST

The suggested parameters for short,

intermediate and long term can be

found in sidebar Figure 1 There

are three steps to calculating the

K ST indicator First, calculate the

four different rates of change

Re-calling the formula for rate of

change (R OC ) is today’s closing

price divided by the closing price n

days ago This result is then

multi-plied by 100 Then subtract 100 to

obtain a rate of change index that

uses zero as the center point

Sec-ond, smooth each R OC with either a

simple or exponential moving

av-Short-term (D) 10 10 1 15 10 2 20 10 3 30 15 4 Short-term (W) 3 3E 1 4 4E 2 6 6E 3 10 8E 4 Intermediate-term (W) 10 10 1 13 13 2 15 15 3 20 20 4 Intermediate-term (W) 10 10E 1 13 13E 2 15 15E 3 20 20E 4 Long-term (M) 9 6 1 12 6 2 18 6 3 24 9 4 Long-term (W) 39 26E 1 52 26E 2 78 26E 3 104 39E 4

I t is possible to program all KST formulas into MetaStock and the CompuTrac SNAP module.

(D) Based on daily data (W) Based on weekly data (M) Based on monthly data (E) EMA.

where:

E2 = New exponential average E1 = Prior exponential average P2 = Current price

Please note the first day’s calculation does not have a prior

exponential average Consequently, you just use the first

day’s price and begin the smoothing process the next day.

Figure 2 is a spreadsheet example of the short-term weekly

K ST using exponential moving averages for the smoothing.

Column C is the three-week rate of change The formula for

cell C20 is:

erage (E MA ) Third, multiply each smoothed R OC by its

prospective weight and sum the weighted smoothed R OC s.

The formula for an exponential moving average (E MA )

requires the use of a smoothing constant ( α ) alpha The

constant used to smooth the data is found using the formula

2/(n+1) For example, for n=3, then α = 2/(3+1)=0.50 The

formula for the E MA is:

E2 = E1 + α (P2 - E1)

Cell G20 is a six-week R OC :

=((B20/B15)*100)-100 Cell H20 is a six-week E MA :

=H19+0.29*(G20-H19) Cell I20 is a 10-week R OC :

=((B20/B11)*100)-100 Cell J20 is an eight-week E MA :

=J19+0.22*(I20-J19)

Finally, cell K20 is the summed weighted smoothed R OC s Each smoothed R OC is weighted according to sidebar Figure 1 and summed:

=D20+(2*F20)+(3*H20)+(4*J20)

—Editor

SIDEBAR FIGURE 1: The ROC column is the rate of change The MA column is the moving average value, and E after the moving average value indicates that the moving average is an exponential moving average Multiply each smoothed ROC by its weight prior to summing the four smoothed ROCs.

=((B20/B18)*100)-100 The three-week rate of change is smoothed with a

three-week E MA The constant used to smooth the

data is found using the formula 2/(n+1) For n=3,

then, the constant equals 2/(3+1)=0.50, and thus, the

formula for cell D20 is:

=D19+0.5*(C20-D19) Cell E20 is a four-week R OC :

=((B20/B17)*100)-100 Cell F20 is a four-week E MA :

=F19+0.4*(E20-F19)

1 2 3 4 5 6 7 8 9

Date S&P 500 3 week 3 Week 4 Week 4 week 6 Week 6 week 10 Week 8 week Summed

920103 419.34 ROC EMA ROC EMA ROC EMA ROC EMA Weighted

SIDEBAR FIGURE 2: SPREADSHEET FOR SHORT-TERM WEEKLY KST.

Here, the KST is calculated using exponential moving averages.

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Reactions are strong

Rallies are short

Corrections are mild

Rallies are strong

INTEGRATION OF PRIMARY AND INTERMEDIATE TRENDS

1

1 2

2 3

FIGURE 3: INTERMEDIATE TREND Pulsating in the midst of primary trends are shorter,

intermediate trends, giving charts a stairstep appearance.

FIGURE 4: THREE INTERMEDIATE CYCLES An idealized market cycle would have

three waves up and three waves down.

MARKET CYCLE MODEL

Short-term trend

FIGURE 5: MARKET CYCLE MODEL Inside the intermediate cycles are short-term cycles

that last from two to six weeks.

Now that all three trends have been discussed, a

couple of points are worth making First, as an

inves-tor, it is best to accumulate when the primary trend is

in the early stages of reversing from down to up and

liquidating when the trend is reversing in the opposite

direction (Figure 6).

Second, as traders, we are better off if we position

ourselves from the long side in a bull market, since

that is the time when short-term trends tend to have the

greatest magnitude By the same token, it does not

usually pay to short in a bull market because declines

can be quite brief and reversals to the upside

unexpect-edly sharp If you are going to make a mistake, it is

more likely to come from a countercyclical trade

(Figure 7) This is where the market cycle model

comes into play.

How can you put this into practice? My favorite

method is to plot three smoothed momentum

indica-tors to mimic the three trends An example can be seen

in Figure 8 using the K ST indicator, originally

intro-duced in S TOCKS & C OMMODITIES in the early 1990s.

The formulas for the three trends can be seen in the

sidebar, “The K ST ”

It’s also possible to substitute other smoothed

mo-mentum indicators For example, three suggested

sets of parameters are displayed in Figure 9 for the

stochastic indicator This arrangement is far from

perfect, but it does provide a framework that offers

the trader and investor a road map of the current

convergence of the short-, intermediate-, and

long-term trends As always, it is important to ensure that

other indicators in the technical toolbox also support

this type of analysis.

This market cycle model approach can be applied to

intraday analysis Obviously, the time frames will

dif-fer radically from the primary, intermediate, and

short-term varieties we looked at previously, but the principle

still applies If you know that a powerful three- to

four-day rally is under way, it would be madness to short a

four-hour countercyclical move Clearly, trading from

the long side would be more appropriate, but you would

only know this if you had identified the bullish intraday

primary trend in the first place I will cover these

shorter-term aspects in another article.

There are three generally accepted trends: short-,

intermediate-, and long-term or primary Secular, or

very long-term, trends also make up several primary

trends and can last between 10 and 25 years At the

other end of the spectrum, intraday data now provides

us with trends of even shorter time spans lasting as

little as 10 to 15 minutes.

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FIGURE 8: KST This indicator, developed by Pring in the early 1990s, is generally reliable in picking out trends.

Moody’s AAA bond yield

Short-term KST

Intermediate KST

MOODY’S AAA BOND YIELDS AND THREE KSTs

It is important for investors to have some idea of the

direction and maturity of the main trend Working on the

assumption that a rising tide lifts all boats, traders should also

try to understand the direction of the main trend even though

they themselves are only concerned with a short time horizon.

A convenient way to chart longer-term trends is to use a

smoothed momentum indicator such as the stochastics or K ST

Veteran trader and technician Martin J Pring founded the International Institute for Economic Research in 1981 Pring

is the author of several books, including the classic

Techni-cal Analysis Explained.

FIGURE 7: DON’T FIGHT THE TREND When trading in and out during a primary trend,

go in the direction of the primary trend, not against it.

Go long rallies but do not short reactions

Short reactions but do not

go long rallies

Time to accumulate

Time to liquidate

FIGURE 6: ACCUMULATE/DISTRIBUTE Naturally, the best time to load up on stocks

is when a cycle bottom is at hand Approaching the top, it’s time to distribute your holdings.

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FIGURE 9: STOCHASTIC SMOOTHING Stochastics of differing-length parameters also pick up trends You can smooth with any of a variety of

momentum indicators.

AAA yield

Stochastic (3x3x3)

Stochastic (10x10x6)

MOODY’S AAA BOND YIELDS AND THREE STOCHASTICS

_ [1993] Martin Pring On Market Momentum,

Interna-tional Institute for Economic Research.

_ [1985] Technical Analysis Explained, McGraw-Hill

Book Co.

_ [1992] “Rate Of Change,” Technical Analysis of

S TOCKS & C OMMODITIES , Volume 10: August.

_ [2000] “Trendline Basics,” Technical Analysis of

S TOCKS & C OMMODITIES , Volume 18: March.

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Stocks & Commodities V16:9 (425-427): Trading the Trend by Andrew Abraham

NEW TECHNIQUES

N

Trading

The Trend

Here’s a volatility indicator, presented here with simple

trend rules for trading various markets.

by Andrew Abraham

ew traders quickly become familar with two adages: “The trend is your friend,” and “Let your profits run and cut your losses.” Many of us, however, have learned the hard way that these things are easier said than

done Why is that? One reason

is lack of recognition, since the trend itself is rarely clarified and defined, let alone where it starts and ends So we need a clear explication of what a trend

is as well as where its beginning and its end are.

Simply, if the trend is considered up, then the trend of prices

are composed of upwaves and the downwaves are countertrend

movements Downward trends are the opposite, seen as

downwaves with countertrend upwaves Using several tools

and functions, we can design a quantifiable approach to

defining these waves My favorite is the volatility indicator,

which is a formula that measures the market volatility by

plotting a smoothed average of the true range The true range

indicator originates from the work of J Welles Wilder Jr from

his New Concepts in Technical Trading Systems The definition

of the true range is defined as the largest of the following:

or

The calculation uses a 21-period weighted average of the true range, giving higher weight to the true range of the most recent bar The final value is then multiplied by 3.

The volatility indicator is used as a stop-and-reverse method Let’s say the market has been rising, then the volatility indicator is calculated each day and subtracted from the highest close during the rising market The highest close is always used, even if there has been a series of lower closes since the highest close If the market closes below the volatility indicator, then for the next day, the current reading

of the volatility indicator is added to the lowest close This step is followed each day until the market closes above the trailing volatility indicator.

We now have a definition of the trend An upward trend exists as long as the volatility indicator is below the market and a downtrend is in force if the volatility indicator is above the market To visualize these waves, we color-code the uptrends blue and the downtrends red (Figures 1 and 2).

In addition, we can add a basic description of trends for trading We will say that uptrends are made up of waves of higher highs, with prior lows not being surpassed Con- versely, downtrends are composed of waves of lower lows and prior highs not being surpassed For sustained moves, the upwaves during uptrends will be larger than the countertrend downwaves, and in downtrends, the downwaves will be larger than the countertrend upwaves Therefore, we want to only trade with the trend and buy upwaves in an uptrend and sell short during a downtrend.

For example, as can seen in Figure 1, for Chase Manhattan

FIGURE 1: CHASE MANHATTAN BANK Use the volatility indicator to signal the

direction of the trend Here, uptrends are in blue, and downtrends are in red.

FIGURE 2: CORN The trend is down during November, switches direction in

January, and returns down in March.

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Copyright (c) Technical Analysis Inc. 2

Bank, the upwave has higher highs

and the prior downwave was not

sur-passed, so the market is in an uptrend;

look to buy only the upwaves In

Figure 2, in the corn market, the

op-posite situation exists and the same

concept is applied, except in this case,

the concept is in reverse because it is

a downtrend During November, the

volatility indicator reversed trend, and

the prior low was broken This was

our signal to go short Our exit signal

will be the volatility indicator turning

positive.

The position was closed in January

1998, and since the rally’s high

begin-ning in January did not surpass the

highs of October, our second definition

of an uptrend was not met As a result,

we went short again when the volatility

indicator went negative In March, the

position was closed with a small loss,

and again, the highs of this upwave did

not surpass the highs of January, so we

had a signal to go short again when the

volatility indicator went negative and

the lows of February were broken.

T HE TENETS OF

Now we are developing the tenets of

good trading We are trading with the

trend and locking in profits But in

that case, how do we know the trend

might be ending?

As stated, an uptrend is intact until

the previous downwave in the uptrend

is surpassed A downtrend is intact until

the previous upwave is surpassed We

will use the lowest low while the

vola-tility indicator signals an uptrend for

our low point This is just an alert that

possibly the trend might change We

would still take the next trade in the

direction of trend (in a confirmed

uptrend, we take all upwaves, and in a

downtrend, all downwaves).

Our next step is to confirm whether

the trend has ended This is confirmed

on our next wave If we are in an

uptrend, and if our last downwave

went below the prior downwave, we

are on alert If the next upwave

sur-passes the prior upwave, our trend is

intact and our alert turned off.

In Figure 3, which shows a chart of

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Stocks & Commodities V16:9 (425-427): Trading the Trend by Andrew Abraham

the Swiss franc, we went short in April 1997 and closed the

position in June 1997 with a nice profit Because the highs of

the prior upwave were not surpassed, we know we are still in

a downtrend and went short again in June 1997 This trade did

not work, however, and the next blue upwave surpassed the

prior blue upwave; thus, we are on alert the trend might be

changing We went short again in September 1997.

To enhance our performance in this strategy, we can use a

dual time frame We look to a higher time frame to identify

the trend and only want to trade in that direction In Figure 4,

we can see we are in a downtrend as well as a downwave on

the five-minute chart of the Standard & Poor’s 500 index, so

we only look to take trades to the short side on the one-minute

chart (Figure 5) We are short from approximately 11:30 in

the morning to the close The trader looks to the lower time

frame to actually find the trades in the same direction of the

higher time frame.

On the one-minute chart, we are looking to trade only from

the short side because the five-minute bars are in a downtrend

from a little after noon In our diagram, we see we had three

trades Two of them worked and in the one that didn’t,

our loss was relatively small If one-minute bars are too

short of a time frame, then consider trading five-minute

bars; the trader would look at the 15-minute chart to

determine the trend.

For example, if on the 15-minute chart he is in an uptrend

and identifies blue upwaves, he would go down to his

five-minute chart, identify a red downwave and prepare a buy-stop

to pull him in the market if an upwave becomes present The

same applies just in reverse for going short.

The time frames can be anything from a 10-tick or 25-tick

to a daily and a weekly There must be substantial differences

between the two frames Some ideas would be 15-minute

versus 60-minute, daily versus weekly, weekly versus monthly.

Neither we nor anyone else has developed a Holy Grail system

or an infallible trend indicator, but through diversification of

FIGURE 3: SWISS FRANC The downtrend from September to March was a smooth

decline.

FIGURE 4: S&P 500 FIVE-MINUTE BARS Midway through the trading day, the

trend was down.

FIGURE 5: S&P 500 ONE-MINUTE BARS There were two profitable short sell

signals, based on the trend of both the five-minute and one-minute bars.

noncorrelated markets and also a diversification of time frames, the probability of success can be obtained.

Andrew Abraham is a trader and a Commodity Trading Advisor with Angus Jackson.

Krausz, Robert [1996] “Dynamic multiple time frames,”

Technical Analysis of STOCKS & C OMMODITIES , Volume 14: November.

Wilder, J Welles [1978] New Concepts in Technical

Trad-ing Systems, Trend Research.

†See Traders’ Glossary for definition

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Rating Trend Strength

by Tushar S Chande

Here's a simple indicator of trend strength It goes like this: A value of +10 signals an uptrend; a value

of -10 signals a downtrend S TOCKS & C OMMODITIES Contributing Editor Tushar Chande uses this simple rating system to help answer the eternal traders' question: Is the market trending?

strength None of these indicators, unfortunately, is perfect You could use J Welles Wilder's average

is trending

Each of these indicators requires the user to determine how many days' data should be used in the

calculations As you vary the indicator length or number of days used in the calculation, however, the

result of the calculation changes also Thus, there is no unambiguous answer If the market were about to enter or leave a trading range, you could get a different indication of trend strength every day — a

frustrating set of circumstances

Here is my way of rating a trend, a method I call trendscore If today's close is greater than or equal to the close x days ago, score one point If today's close is less than the close x days ago, the trend's rating loses

one point

Next, compare today's close to the close x+1 days ago If today's close is greater than or equal to that

close, score another point Deduct one point if the close is lower than the prior close

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Stocks & Commodities V 11:9 (382-386): Rating Trend Strength by Tushar S Chande

If (today's close >= close x days ago) then score = 1

If (today's close < close x days ago) then score = -1

Add up the score for 10 comparisons; the score varies from + 10 to -10 If today's close is greater than all the previous closes, then the trend's score is +10; if today's close is less than all the previous closes, the score is -10 You could smooth? the data by adding fewer than 10 days or more than 10 days

Trendscore = 10-day sum of scores from days 11 to 20

I begin my calculations at 11 days back from the present and go back another 10 days Thus, I compare today's close to the closes from 11 to 20 days ago If today's close is greater than all 10 closes, then the trend's score is +10 If today's close is less than the closes from 11 to 20 days ago, then the trend's score is -10 In sideways markets, the score ranges from +10 to -10 A positive score shows an upward trend bias Similarly, a negative score shows a downward bias

I prefer the 11- to 20-day period because it fits my trading horizon A shorter time of comparison may be too volatile, producing frequent trend change signals, while a longer comparison time is slow to respond During long trends, the trendscore remains at the outer limits, +10 or -10, for the duration of the trend In sideways markets, the score doesn't remain at +10 or -10 for long, oscillating between these limits

Note how the VHF indicates neither the sign nor the direction of

the trend, while the trendscore indicates both the trend direction and trend strength.

We can use MetaStock to rate trends using the trendscore method In MetaStock's formula builder, we use the ref function to refer to past data:

from early June through mid-August, falling off close to the top It rallied to +10 briefly in late

September and early October However, it quickly settled to -10 well before the October 1987 crash In

The score was at +10 during each upward trend The brief corrections were enough to send the score

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FIGURE 2: TRENDSCORE, GE, 1992-93 In more recent price action, G E 's score moved quickly but smoothly to catch the major trends The score was at +10 during each upward trend The brief

corrections were enough to send the score down to -10 for short periods.

FIGURE 1: TRENDSCORE, GE, 1987 Figure 1 shows the trendscore for General Electric (G E )

common stock for 1987 Note how the score vacillated during the sideways period from April to June

G E 's trendscore remained close to or at +10 from early June through mid-August, falling off close to the top It rallied to +10 briefly, in late September and early October However, it quickly settled to -10 well before the October 1987 crash.

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down to -10 for short periods

trendscore was pinned to +10 during major portions of the upward move, and it was quick to change

directions during sideways periods You can get a closer look at the trading range action in Figure 4 The trendscore came off its +10 reading in late January 1993 and rallied back up to +10 in February through March However, it settled down in the -10 area on March 22 The -10 reading of April 15 caught the

break through 110 to the 90 area

We would expect a loss in momentum as Intel enters the sideways range You can verify this in Figure 5,

January and trended lower through April Other long-range momentum indicators would confirm this

drop in momentum

Figure 6 shows the 28-day vertical/horizontal filter This trend indicator displays similar behavior in early

between February and early April and has trended higher since The trendscore flattened out at -10

while the trendscore indicates both the trend direction and trend strength (+ 10 or -10)

You could trade the trendscore many ways You could use the zero crossing as an early signal You

would then buy when the trendscore becomes positive and sell when it becomes negative Or you could wait one to three days after the trendscore reaches +10 or -10 before buying (+ 10) or selling (-10) Or you could combine the trendscore with a moving average, trading an upward or downward cross over

Another variation would be to go long after the trendscore crosses from -10 to above +5 and go short

after the trendscore falls from +10 to below 5 The approach you choose depends on your trading style.You could also smooth the trendscore with more or fewer days than I used in my calculations You could, for example, use fewer than 10 days for short-term and 20 to 30 days for intermediate-term trading You could also combine trendscore with other indicators of trend strength For example, if you combined it

additional information about the trend's strength

You could also substitute intraday data in the trendscore method for short-term trading, using hourly data

to calculate a trend's score instead of daily data

Trendscore is a simple way to rate trend strength It indicates both the direction and strength of the trend and can be easily combined with various trend-following strategies

Tushar Chande, C TA , holds a doctorate in engineering from the University of Illinois and a master's

degree in business administration from the University of Pittsburgh He is a principal of Kroll, Chande,

& Co.

A DDITIONAL READING

Appel, Gerald [1985] The Moving Average Convergence-Divergence Trading Method , Advanced

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FIGURE 3: TRENDSCORE, INTC, 1992-93 Intel had a big upward move in 1992-93 before entering a broad sideways period The trendscore was pinned to +10 during major portions of the upward move, and it was quick to change directions during sideways periods.

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FIGURE 4: TRENDSCORE, INTC, EARLY 1993 You can get a closer look at the trading range action The trendscore came off its +10 reading in late January 1993 and rallied back up to + 10 in February through March However, it settled down in the -10 area on March 22 The -10 reading of April 15 caught the break through 110 to the 90 area.

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FIGURE 5: INTC, WITH MACD, EARLY 1993 We would expect a loss in momentum as Intel enters the sideways range You can verify this here, where the moving average convergence/divergence indicator(Macd) is displayed The M ACD peaked in early January and trended lower through April Other long-range momentum indicators would confirm this drop in momentum.

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FIGURE 6: VHF WITH 28-DAY FILTER, EARLY 1993 Figure 6 shows the 28-day vertical/horizontal filter This trend indicator displays similar behavior in early January coming off its highs at almost the same time as the trendscore V HF formed a double bottom between February and early April and has trended higher since The trendscore flattened out at -10 somewhat before the V HF Note how the V HF

indicates neither the sign nor the direction of the trend, while the trendscore indicates both the trend direction and trend strength (+10 or -10)

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Colby, R.W., and T.A Meyers [1988] The Encyclopedia of Technical Market Indicators , Dow

Jones-Irwin.

Pring, Martin J [ 1985] Technical Analysis Explained, McGraw-Hill Book Co.

Wilder, J Welles [1978] New Concepts in Technical Trading Systems , Trend Research.

4 Copyright (c) Technical Analysis Inc.

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Stocks & Commodities V 10:7 (313-315): Stocks According To Trend Tendency by Stuart Meibuhr

Stocks According To Trend Tendency

by Stuart Meibuhr

Many times, a question asked of S TOCKS & C OMMODITIES readers will more than likely find an answer — and more than an answer, further questions Such was the article that E Michael Poulos presented early

in 1991, when he showed how assumed trend tendencies ain't necessarily so Here, Stuart Meibuhr

answers one of those corollary questions If certain futures contracts show decided trend tendencies, can the same be said about certain stocks or indices?

futures trend the most?" In turn, that question triggered a corollary question, "Which stocks or stock

indices trend the most?" Poulos's methodology involved measuring the difference between the highest high and the lowest low for seven channel lengths (days) from 1 to 49 The range was averaged to arrive

at an average channel height for one-, two-, four-,nine-, 16-,25-, 36- and 49-day channels Each average was divided by the average for the one-day channel to arrive at a ratio

Applying the same methodology to several market indices and seven stocks provided some enlightening information A spreadsheet program was used for the calculations on data transferred from a charting

program Only those securities with histories dating to back before 1985 were used Data for any holidays were eliminated before the trend calculations All calculations were performed on data dating from

January 2, 1985, to January 31, 1992, a period of seven years and one month

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Last year 1.00 2.10 3.20 4.42 5.75 6.77 7.55

Last two years 1.00 2.17 3.33 4.50 5.75 6.88 7.89

Middle one year 1.00 2.19 3.36 4.57 5.86 7.05 8.17

First two years 1.00 2.23 3.42 4.65 5.87 7.05 8.03

For each security and index, six different time periods were

ana-lyzed.

Channel Square 7 yrs, 1 month from January 1, 1965

length root of

(days) length Channel height ratio to one

OTC SPX OEX MMI DJIA LLY NME IBM MER TX GM X

25-d 5 9.13 6.43 5.89 5.72 4.48 6.64 6.32 6.22 6.21 6.04 5.85 5.84 36-d 6 11.48 7.80 7.10 6.91 5.36 8.05 7.71 7.58 7.43 7.22 7.10 7.00 49-d 7 13.84 9.10 8.25 8.03 6.19 9.41 9.07 8.86 8.63 8.34 8.33 8.06

DATA FOR 7 YEARS AND A MONTH

An indication of trend tendency is if the ratio of the average channel height to the averge daily range is larger than the square root of the channel length The N ASDAQ index showed the greatest tendency to trend, while Xerox ranked the least.

1-d 1 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 4-d 2 2.70 2.34 2.22 2.18 1.86 2.38 2.31 2.25 2.28 2.26 2.25 2.26 9-d 3 4.68 3.67 3.43 3.35 2.73 3.79 3.62 3.52 3.58 3.50 3.45 3.45 16-d 4 6.84 5.03 4.64 4.52 3.59 5.20 4.98 4.85 4.91 4.78 4.64 4.63

FIGURE 2

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Stocks & Commodities V 10:7 (313-315): Stocks According To Trend Tendency by Stuart Meibuhr

For each security, I analyzed six different time periods, which consisted of the entire data set; the first

year, the first two years; the last year; the last two years; and one year selected from the middle This

ensured that the ratios were independent of the selected time periods This turned out not to be

periods

Although some variations amounted to almost 10% between the smallest and the largest ratio for any

given time period, the trends from the shortest to the longest time period remained the same

Consequently, the ratios for only the entire seven years and one month of data are reported here for the other studied securities These results for five stock market indices and seven stocks can be seen in

Figure 2

The indices and the stocks are ranked separately in descending order of their ratios The data for the S&P

500 represent only six years and seven months and differs significantly from those reported by Poulos The data here were for the S&P 500, whereas Poulos's data represented spliced future contracts and the time periods covered were different The trending tendency of indices appears to increase with the

increasing number of securities that make up that index Unfortunately, that does not explain why the

were consistently below the square root point, which, according to mathematician W Feller, evinces a lack of trends All other indices showed strong trending characteristics, with the over-the-counter

and Xerox (X) ranking last for trending tendency Other companies and symbols are: General Motors

If options are the tradeable, then it is imperative to follow the index on which the options are based and

not the DJIA, because the DJIA tends not to trend The same conclusion can be drawn about stocks; the

short-term trader would prefer to deal in options on stocks that have high trending behavior Overall, with this methodology, the trader can ascertain the trending behavior of any security before expending time and capital on a trade

Stuart Meibuhr trades stocks and options for his own account He has lectured and taught on

computerized investment topics for the past 10 years.

A DDITIONAL READING

Poulos, E Michael [1992] "Futures according to trend tendency, S TOCKS & C OMMODITIES , January.

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FIGURE 4 The DJIA showed less tendency to trend than the Major Market Index did.

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FIGURE 5 The NASDAQ index demonstrated the highest degree of trending tendency.

Tiêu đề	Detecting Trend Direction & Strength - Star et al
Tác giả	Barbara Star
Trường học	Unknown
Chuyên ngành	Stock Market Technical Analysis
Thể loại	Article
Năm xuất bản	2001

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Số trang	55
Dung lượng	3,46 MB